Principles for Handling Preferred Dividends and Reward and Welfare Funds

Principles for Handling Preferred Dividends and Reward and Benefit Funds (illustrative image)

Article 23 of Circular 202/2014/TT-BTC stipulates the principles for handling preferred dividends and reward and benefit funds. Before determining the share of the parent company and non-controlling shareholders in the subsidiary, the parent company must make the following adjustments:

1. Preferred Dividends of Non-Controlling Shareholders

- For preferred shares classified as liabilities: Preferred dividends are accounted for as financial expenses, and the parent company does not need to adjust when consolidating financial statements.

- For preferred shares classified as equity: The parent company must separately determine the preferred dividends of non-controlling shareholders according to the following principles:

- Separately determine the preferred dividends from post-tax profits in the period before distributing post-tax profits to common shareholders. The value of preferred dividends allocated to non-controlling shareholders is based on the holding ratio of preferred shares;- The cumulative preferred dividends of previous periods not yet paid to non-controlling shareholders must be separated from the undistributed post-tax profits at the beginning of the period on the subsidiary's Balance Sheet before calculating the ownership share of common shareholders;- The separation of preferred dividends must be done before allocating to the reward and benefit fund;- Since the holding ratios of preferred shares and common shares by the parent company and non-controlling shareholders may differ, the determination of shareholders' ownership interests in the net assets of the subsidiary and goodwill (if any) is done according to the principle: Allocate to preferred shareholders the value of preferred share capital corresponding to each shareholder's ownership ratio; and Allocate to common shareholders the total residual equity value after subtracting the preferred share capital.

2. Regarding the Reward and Benefit Funds

- In cases where the subsidiary's financial statements used for consolidation have allocated to the reward and benefit fund according to the charter, when preparing the consolidated financial statements, the parent company only adjusts the part of the non-controlling shareholders' interests.

- In cases where the subsidiary's financial statements used for consolidation have not yet allocated to the reward and benefit fund according to the charter, when preparing the consolidated financial statements, the parent company must estimate the reward and benefit fund that the subsidiary must allocate in the period and exclude it from the undistributed post-tax profit before determining the ownership shares of the parent company and non-controlling shareholders.

Details can be found in Circular 202/2014/TT-BTC which took effect from February 27, 2015.

Ty Na

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